In re Kaliana
| Decision Date | 21 April 1997 |
| Docket Number | Adv. No. 96 A 00109.,Bankruptcy No. 95 B 9323 |
| Citation | 207 BR 597 |
| Parties | In re Muthukumaran KALIANA, Debtor. STATE BANK OF INDIA, Plaintiff, v. Muthukumaran KALIANA, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
John Moore, Chicago, IL, for plaintiff.
Gregory K. Stern, Gregory K. Stern, P.C., Chicago, IL, for defendant.
This matter comes before the Court on the motion for sanctions pursuant to Federal Rule of Bankruptcy Procedure 9011 filed by Muthukumaran Kaliana (the "Debtor") against State Bank of India (the "Bank") and one of its attorneys, John Moore ("Moore"), and their response in opposition thereto. For the reasons set forth herein, the Court denies the motion.
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (J), and (O).
Most of the relevant facts and background are contained in a Memorandum Opinion dated November 27, 1996 wherein the Court denied the Bank's request to revoke the Debtor's discharge. See State Bank of India v. Kaliana (In re Kaliana), 202 B.R. 600 (Bankr.N.D.Ill.1996). The Court found that, although the Debtor had fraudulently concealed a foreign bank account and its proceeds (the "Account"), the Bank had prior knowledge of the existence of the Account, which was located at one of its branches in India, thereby defeating its cause of action under 11 U.S.C. § 727(d)(1). The Court referred the matter to the United States Attorney pursuant to 18 U.S.C. § 3057(a) because of the Debtor's nondisclosure and concealment of the Account. 202 B.R. at 606.
The Bank's knowledge of the Account was evidenced by a certain letter dated July 7, 1988 (the "July 7th letter") from the manager of the Bank's Chicago branch to the manager of its Madras branch. See Debtor's Exhibit No. 3. The July 7th letter was later discovered in the Bank's files after the Debtor's discharge was entered on September 1, 1995. The discovery of the July 7th letter prompted the Bank's investigation into the Debtor's alleged fraud and the subsequent filing of the complaint.
Represented by Moore, the Bank filed its original complaint to revoke the Debtor's discharge on January 26, 1996, and its first amended complaint on May 3, 1996, which Moore signed on behalf of the Bank. See Bank's Exhibit Nos. 1 and 2. The Bank's basis for filing the complaint was the Debtor's failure to disclose the Account. Moore testified that he first became aware that the July 7th letter had been located in the Bank's file on October 16, 1996, during the pretrial discovery incidental to the Debtor's attorneys' request for production of documents.
On January 13, 1997, the Debtor, through his attorneys, Gregory K. Stern, P.C., filed the instant motion under Bankruptcy Rule 9011 seeking to tax the Bank and Moore with the Debtor's unpaid attorneys' fees in the sum of $6,786.65 for the defense against the Bank's attempted revocation of the Debtor's discharge. The Debtor contends that the Bank and Moore had knowledge of the existence of the July 7th letter before the original complaint was filed. Therefore, the allegation in the complaint that the Debtor's fraud was unknown and undetected by the Bank until after the Debtor's discharge order was entered was not well grounded in fact. The Debtor also contends that at no time did the Bank or Moore assert that the filing of the complaint was warranted by a good faith argument for the extension, modification or reversal of existing law, given the existence of the July 7th letter.
Gregory K. Stern testified in support of the motion. In his opinion, all the services rendered were both reasonable and necessary for the Debtor's defense. As early as March 1996, he questioned the viability of the Bank's cause of action and discussed it with Moore on several occasions. He concluded that the Bank's contention that its Chicago branch should be treated as if it were a separate corporate entity from the Madras branch was unsupported by case law and was not a properly articulated good faith argument for the modification, extension, or reversal of existing law. Additionally, Stern testified that he thought the Bank's cause of action was fatally flawed from the outset because of the existence of the July 7th letter in the files of the Bank's Chicago branch by which it had knowledge of the Debtor's Account. Stern further stated that the law firm was owed between $6,000.00-$7,000.00 in unpaid accrued fees for the defense of the Bank's complaint. Stern and his associates first became aware of the July 7th letter when it was furnished to them by Moore at the time discovery closed, just prior to the trial.
In their response in opposition to the motion, the Bank and Moore contend that at the time of the Debtor's discharge, no officer or natural person at the Bank's Chicago branch had knowledge of the July 7th letter. Further they argue that the complaint made a good faith argument for the extension or modification of existing law because the Bank lacked a central registry system, and the Chicago branch essentially operated as a separate banking entity under the Illinois Foreign Banking Office Act, 205 ILCS 645/1 et seq. Consequently, the Bank's corporate knowledge of the Account prior to the Debtor's discharge could not be imputed to the Chicago branch. In addition, they raise five affirmative defenses: (1) the Court lacks jurisdiction because the motion was not filed within the time limit of Local General Rule 46 of the United States District Court for the Northern District of Illinois; (2) the motion is untimely; (3) the motion fails to state a cause of action; (4) the Debtor failed to mitigate damages by allowing the revocation proceeding to proceed to trial rather than earlier disposition on motion for summary judgment, judgment on the pleadings or a motion to dismiss; and (5) it would be inequitable to grant the relief requested in light of the Court's findings in its Memorandum Opinion and the referral to the United States Attorney for possible criminal prosecution of the Debtor as a result of his fraudulent concealment of the Account. The Court will address the instant motion and the defenses thereto in turn.
Federal Rule of Bankruptcy Procedure 9011(a) provides in relevant part:
Every petition, pleading, motion . . . served or filed in a case under the Code on behalf of a party represented by an attorney . . . shall be signed. . . . The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney\'s or party\'s knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass, or to cause unnecessary delay or needless increase in the cost of litigation or administration of the case. . . . If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney\'s fee.
Bankruptcy Rule 9011 and former Federal Rule of Civil Procedure 11 are analogous and cases interpreting former Rule 11 () are useful in analyzing Bankruptcy Rule 9011. See In re International Oriental Rug Center, Inc., 165 B.R. 436, 441 (Bankr.N.D.Ill.1994); In re Chapman, 154 B.R. 258, 265 (Bankr. N.D.Ill.) (citation omitted), aff'd, 159 B.R. 812 (N.D.Ill.1993), aff'd, 46 F.3d 1133 (7th Cir.), cert. denied, ___ U.S. ___, 116 S.Ct. 153, 133 L.Ed.2d 97 (1995). Moore, as attorney for the Bank, signed the original and first amended complaints thereby triggering the potential for Bankruptcy Rule 9011 sanctions against him and his client, the Bank.
The primary purpose of both rules is to deter unnecessary filings for the benefit of the judicial system. Szabo Food Serv., Inc. v. Canteen Corp., 823 F.2d 1073, 1077-1080 (7th Cir.1987), cert. dismissed, 485 U.S. 901, 108 S.Ct. 1101, 99 L.Ed.2d 229 (1988). Rule 11 is not a fee shifting statute requiring the loser to pay; the focus of Rule 11 is on conduct rather than on results. See Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 932 (7th Cir.1989) (en banc).
Former Rule 11 contains two grounds for the imposition of sanctions: (1) the "frivolousness clause," which looks to whether a party or an attorney for a party made a reasonable inquiry into both the facts and the law; and (2) the "improper purpose clause," which looks to whether a document was interposed for an improper purpose, such as delay, harassment, or increasing the cost of litigation. Brown v. Federation of State Medical Bds. of the United States, 830 F.2d 1429, 1435-36 (7th Cir.1987), abrogated on other grounds, Mars Steel, 880 F.2d at 930. The standard for imposing sanctions under both bases is an objective determination of whether a sanctioned party's conduct was reasonable under the circumstances. Pacific Dunlop Holdings, Inc. v. Barosh, 22 F.3d 113, 118 (7th Cir.1994); Chambers v. American Trans Air, Inc., 17 F.3d 998, 1006 (7th Cir.), cert. denied, 513 U.S. 1001, 115 S.Ct. 512, 130 L.Ed.2d 419 (1994).
The signer's conduct must be judged by inquiring what was objectively reasonable to believe at the time the pleading was signed. LaSalle Nat. Bank of Chicago v. County of...
To continue reading
Request your trial